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Spokane, Washington  Est. May 19, 1883

America Online Acquires Compuserve’s Customers

Associated Press

America Online will acquire the 2.6 million subscribers of its closest competitor, CompuServe Corp., in a three-way deal with WorldCom Inc. that reshapes the online business.

WorldCom, the nation’s fourth-largest long-distance phone company, will pay $1.2 billion for CompuServe and sell its online usiness to AOL, under the agreement announced Monday.

If approved by government regulators, the deal would erase one of America Online’s biggest competitors and aid its goal of selling more online advertising. Adding CompuServe’s subscribers to AOL’s nearly 9 million would create a cyberspace behemoth, with 60 percent of Americans using the Internet from home gaining access through AOL, according to the Yankee Group, a Boston-based research firm.

For its part, WorldCom becomes a giant in its corner of the Internet, expanding its business of providing networks for online services and business customers.

If the sale is completed, AOL will operate CompuServe as a separate business and online subscribers may notice little difference, at least initially.

AOL, which features more entertainment services, such as games and chat lines, doesn’t plan to change CompuServe’s online format, which is geared to business professionals. Likewise, AOL doesn’t plan to change its monthly fee of $19.95 for unlimited access or CompuServe’s fees of up to $27.95 a month.

AOL is “being very mindful that they don’t disrupt the CompuServe customer,” said Abhishek Gami, an analyst with Nesbitt Burns Securities Inc., based in Chicago.

More immediately, some AOL users may have an easier time getting online. The terms of the deal would give AOL access to an additional 100,000 modems from WorldCom, helping ensure it won’t be hobbled by network bottlenecks that frustrated subscribers with busy signals earlier this year.

“The most significant benefit to AOL members is improved access,” AOL chief executive Steve Case said in a telephone interview. But, he said, “We’re in a walk-before-we-run mode here.”

Wall Street embraced the news, with AOL stock soaring more than 10 percent before easing somewhat. It closed up $6.12-1/2 per share to $76.06-1/4 on the New York Stock Exchange. On the Nasdaq Stock Market, WorldCom rose $2.25 to $33.75. CompuServe, which is valued at $13 by the deal, slipped 18-1/4 cents to $12.34.

The complex three-company agreement, worked out over the past month, enables CompuServe parent H&R Block, which owns 80 percent of the ailing online service, to exit a market that has caused frustrations for more than a year. CompuServe, the second-largest online service behind AOL, has been beset by financial losses, member defections and the cancellation of its family oriented Wow service just seven months after it was started.

CompuServe, based in Columbus, Ohio, pioneered the online business in the 1980s, but was overtaken by America Online in the 1990s and hammered by cheaper providers of online service and access to the World Wide Web.

WorldCom is giving stock worth about $1.2 billion to H&R Block, based on Friday’s closing stock price. It then plans to trade CompuServe’s content and its 2.6 million consumer subscribers as well as pay $175 million to AOL.

In exchange, WorldCom will get AOL’s ANS Communications division, which provides Internet access mainly for large business customers. WorldCom already owns UUNet Technologies Inc., one of the largest Internet service providers. WorldCom also gets a five-year contract to service AOL’s network customers.

A larger AOL would be in a better position to compete with the Microsoft Network, the nation’s third-largest online service with about 2.3 million subscribers.

Analysts said that AOL could snag more advertising dollars, which currently comprise about 15 percent of its revenues. One possible scenario is giving a break on its ad rates to advertisers who place ads in both CompuServe and AOL’s services.

“One of the precepts in the Internet advertising area is the ad dollars will flow to the largest player in a disproportionate manner because you’re an easier buy for advertisers,” said Gami, the analyst.

The parties expect approval by the end of the year.

A plan to make CompuServe a separate stock company owned by H&R Block shareholders was withdrawn after Internet stocks in general declined.